Global Economics

Bulgaria Gets Real about Its Economy

Since Boyko Borisov took over as prime minister, Bulgaria has been more candid and effective about economic reform, but big challenges remain

Until the parliamentary elections in July, the Bulgarian government appeared to be in denial about the approaching economic crisis. Days after the collapse of Lehman Brothers, and just as financial panic had paralyzed the world, former (Socialist) Prime Minister Sergei Stanishev gave an interview in which he denied the existence of a crisis in Bulgaria and called the country "an island of stability."

Foreign observers strongly disagreed. While the collapse of the Bulgarian stock exchange (which lost about 85 percent of its value in a year and a half) could be explained away as desperate short-selling on the part of foreign investors striving to survive the U.S. subprime crisis, the enormous trade deficit of the country and the many other warning signs could hardly be ignored. A Credit Suisse (CS) global vulnerability report published early this year ranked Bulgaria second most financially vulnerable country on the list, after Iceland (which at that point had just gone bankrupt). Some experts (such as Mary Stokes of RGE Monitor) even questioned the stability of the currency peg – a sacred cow in Bulgarian economics since its inception in 1997 at the International Monetary Fund's urging, and considered by many to be the most important basis of Bulgarian stability.

In this context it is hardly a surprise that last year, when the deputy director of the Bulgarian National Bank claimed that the currency peg was as stable as Orlov Most (one of the symbols of Sofia), many thought it an inapt comparison, and some even privately joked about the demise of the historic bridge. The optimism of the political elite, however, lasted until this year's elections, when a new government headed by Boyko Borisov took over.

In a way, it was a romantic success story for Borisov. While GERB (Citizens for the European Development of Bulgaria), his recently established center-right party, had a persistent lead in the polls, not even the most seasoned pundits were able to predict his sweeping victory and the formation of a single-party minority government (something unheard of in modern Bulgarian history).

The widely assumed corruption and inefficiency of the former government, reflected by constant EU reprimands and blocked union funds, arguably proved crucial; growing nationalist sentiments also helped Borisov. Yet the former coalition's Pollyanna reaction to the snowballing economic crisis at home stands out as a singular factor that added unprecedented urgency to the situation and brought over 60 percent of eligible voters to the polls.

Getting Serious

Immediately after Borisov took office, his team started publishing entirely new figures. The new minister of finance, former World Bank chief economist Simeon Dyankov, announced that the previous government had left a budget deficit of over 1.25 billion euros. It is not entirely clear what the calculation will look like at the end of the year, but Dyankov claimed that the economy would bottom out some time in the coming winter, and that a deficit of more than 1.5 billion euros would be very difficult to cover without external loans.

Emergency measures were announced immediately, targeting two broad areas: government expenditures and the gray economy. Most ministries' budgets were cut by a flat 15 percent, and a number of deals signed by the previous government were revised and canceled, including the lease of two airplanes for the travel needs of ministers. Borisov made it clear that he would not spare even large infrastructure projects should they prove unprofitable or too difficult to fund, and immediately pointed a finger at two Russian ventures: the construction of a nuclear power plant at Belene and the Bourgas-Alexandroupoli oil pipeline. On the gray economy front, he set out to combat corruption and to reform the customs and the revenue collection system.

While there is still a lot of uncertainty shrouding the new government's policies and the development of the economic crisis, Borisov registered some quick victories. Many corruption cases were sent to court within weeks, including one against a former agriculture minister. The EU reacted very positively to this strong approach and announced the unblocking of hundreds of millions of euros worth of funds (the precise amount of money that the economy can absorb will depend in part on what action the government takes in the coming months). A radical reform in the customs and border police is under way, and the force's information system is being linked to that of the revenue system. In this way, the government hopes to collect an extra 600 million euros by year's end.

After some initial tensions, even Russian investors appeared to react positively to Borisov's overtures. Last week, Sergei Kirienko, the director of the Russian nuclear agency Rosatom, announced that Russia might be willing to buy a larger share of the Belene nuclear plant should the Bulgarian government decide to reduce its investment.

The road ahead remains fraught with challenges. Bolstered in part by the EU's financial support, Borisov's team has prioritized the construction of roads and other transport infrastructure: a move as if straight out of the Keynesian toolbox for combating a crisis. The impact of other proposed policies, however, is less clear and more difficult to gauge. While restructuring government agencies and slashing state spending might be difficult to avoid and economically profitable in the mid- to long term, in the short term it will leave thousands unemployed.

Will Borisov be able to compensate for this? A unique aspect of this particular crisis in Bulgaria is the proportion of the burden borne by the public. Whereas in the 1990s the state was responsible for the overwhelming portion of Bulgaria's foreign debt, today over 82 percent of the country's 37 billion euro debt is privately held. Moreover, the gray economy is part of everyday life here, and statistics show that between 25 percent and 40 percent of all economic activity is part of it. It is absurd to assume that just a few rich criminals profit from the gray economy: small-scale economic activity "under the radar" has traditionally been an important survival mechanism for many Bulgarians, particularly in times of crisis.

History is full of examples where those most in need are those most affected by an economic crisis; there is a great danger that in Bulgaria, too, the poor will pay the price of economic stability for the state.